nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒08‒30
43 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Distributional Effects of Monetary Policy in Emerging Market Economies By Prasad, Eswar; Zhang, Boyang
  2. Mortgages and Monetary Policy By Carlos Garriga; Finn E. Kydland; Roman Šustek
  3. Combining Monetary Policy and Prudential Regulation: an agent-based modeling approach By Michel Alexandre da Silva; Gilberto Tadeu Lima
  4. Housing Bubbles and Monetary Policy: A Reassessment By Graeme O'Meara
  5. Country Shocks, Monetary Policy Expectations and ECB Decisions. A Dynamic Non-Linear Approach By Máximo Camacho; Danilo Leiva-León; Gabriel Pérez-Quiros
  6. Is Optimal Monetary Policy Always Optimal? By Davig, Troy; Gürkaynak, Refet S.
  7. Uncertainty and the signaling channel of monetary policy By Tang, Jenny
  8. Bank of Japan's Monetary Policy in the 1980s: a View Perceived from Archived and Other Materials By Masanao Itoh; Ryoji Koike; Masato Shizume
  9. The Equilibrium Real Funds Rate: Past, Present and Future By James D. Hamilton; Ethan S. Harris; Jan Hatzius; Kenneth D. West
  10. Determinate liquidity traps By Demostenes N. Tambakis
  11. The Role of Shadow Banking in the Monetary Transmission Mechanism and the Business Cycle By Falk Mazelis; ; ;
  12. Merging mandatory saving and monetary policy By Alfred Duncan
  13. What effects exert Economic Globalization and Central Bank Transparency on inflation of OECD countries? An Application of LSDVC Estimator on a dynamic Panel Model By Emna Trabelsi
  14. Market beliefs about the UK monetary policy life-off horizon: a no-arbitrage shadow rate term structure model approach By Andreasen, Martin M; Meldrum, Andrew
  15. Central Bank Interventions, Demand for Collateral, and Sovereign Borrowing Costs By Luís Fonseca; Matteo Crosignani; Miguel Faria-e-Castro
  16. The intraday interest rate: What's that? By Abbassi, Puriya; Fecht, Falko; Tischer, Johannes
  17. The impact of unconventional monetary policy on firm financing constraints: evidence from the maturity extension program By Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison
  18. Euro area monetary and fiscal policy tracking design in the time-frequency domain By Crowley, Patrick; Hudgins, David
  19. Exchange Rate Regimes and Persistence of Inflation in Thailand By Jiranyakul, Komain
  20. The trade credit channel and monetary policy transmission: empirical evidence from U.S. panel data By Altunok, Fatih; Mitchell, Karlyn; Pearce, Douglas
  21. Inflation Targeting: A Victim of Its Own Success? By Christian Gillitzer; John Simon
  22. Should stay the Mali in Zone franc area ? By Sidibe, Tidiani
  23. Disentangling qualitative and quantitative central bank influence By Paul Hubert
  24. Structural Reforms and Stabilization Policies in the Euro Area By Alho, Kari E.O.
  25. On the Sensitivity of Banking Activity to Macroeconomic Shocks: Evidence from CEMAC Sub-region By Christian-Lambert Nguena; Roger Tsafack-Nanfosso
  26. Forecasting Core Inflation: The Case of South Africa By Franz Ruch; Mehmet Balcilar Author-Name-First Mehmet; Mampho P. Modise; Rangan Gupta
  27. Impacts of foreign exchange auctions on the informal market rate in Myanmar By Kubo, Koji
  28. Back to Gold: Sterling in 1925 By Gerlach, Stefan; Kugler, Peter
  29. A Critique of Modern Money Theory and the Disequilibrium Dynamics of Banking and Government Finance By Tianhao Zhi
  30. Monetary-Financial Stability under EMU By Lane, Philip R.
  31. Population ageing and prices in an OLG model with money created by credits By Fedotenkov, Igor
  32. The Role of Economic Policy Uncertainty in Forecasting US Inflation Using a VARFIMA Model By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  33. Financial Fragmentation Shocks By Paulo Júlio; Ricardo Mourinho Félix; Gabriela Lopes de Castro; José R. Maria
  34. The functions of money and the demand for liquidity By Claudio Sardoni
  35. The Federal Reserve's Discount Window and TAF Programs: "Pushing on a String?" By Berger, Allen N.; Black, Lamont K.; Bouwman, Christa H. S.; Dlugosz, Jennifer
  36. Forecasting South African Inflation Using Non-Linear Models: A Weighted Loss-Based Evaluation By Pejman Bahramian; Mehmet Balcilar; Rangan Gupta; Patrick T. kanda
  37. Are monetary unions more synchronous than non-monetary unions? By Crowley, Patrick; Trombley, Christopher
  38. Revisiting the greenbook's relative forecasting performance By Paul Hubert
  39. FED Liquidity Policy during the Financial Crisis: Playing for Time By Eisenbeis, Robert; Herring, Richard
  40. "Choice of Collateral Currency Updated--A market model for the benchmark pricing--" By Masaaki Fujii; Akihiko Takahashi
  41. Constrained random walk models for euro/Swiss franc exchange rates: theory and empirics By Sandro Claudio Lera; Didier Sornette
  42. Can a DSGE Model Explain a Costly Disinflation? By Maria Ferrara; Patrizio Tirelli
  43. Price dispersion and inflation rates: evidence from scanner data By Castellari, Elena; Moro, Daniele; Platoni, Silvia; Sckokai, Paolo

  1. By: Prasad, Eswar (Cornell University); Zhang, Boyang (Cornell University)
    Abstract: We develop a two-sector, heterogeneous-agent model with incomplete financial markets to study the distributional effects and aggregate welfare implications of alternative monetary policy rules in emerging market economies. Relative to inflation targeting, exchange rate management benefits households in the tradable goods sector but in the long run these households are worse off due to higher consumption volatility. A fixed exchange rate reduces the welfare of these households and aggregate welfare when the economy is hit by positive shocks to nontradable goods productivity or foreign interest rates. Fiscal policy can more efficiently achieve similar short-run distributional objectives as exchange rate management.
    Keywords: monetary policy rules, exchange rate management, interest rate smoothing, distributional effects, emerging markets, financial frictions, inflation targeting
    JEL: E25 E52 E58 F41
    Date: 2015–08
  2. By: Carlos Garriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California–Santa Barbara and NBER); Roman Šustek (Queen Mary University of London and Centre for Macroeconomics)
    Abstract: Mortgages are prime examples of long-term nominal loans. As a result, under incomplete asset markets, monetary policy can affect household decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels are distinct from the transmission through real interest rates. A stylized general equilibrium model in corporating these features is developed. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger real effects than transitory shocks. The transmission is stronger under adjustable-than fixed-rate mortgages. Higher, persistent, inflation benefits homeowners under FRMs but hurts them under ARMs.
    Keywords: Mortgages, Debt servicing costs, Monetary policy, Residential investment
    JEL: E32 E52 G21 R21
    Date: 2015–08
  3. By: Michel Alexandre da Silva; Gilberto Tadeu Lima
    Abstract: The aim of this paper is to study the interaction between monetary policy and prudential regulation in an agent-based modeling framework. In the model proposed here, firms borrow funds from the banking system in an economy regulated by a central bank. The central bank is responsible for carrying out monetary policy, by setting the interest rate, and prudential regulation, by establishing the banking capital requirement. Different combinations of interest rate and capital requirement rules are evaluated regarding both macroeconomic and financial stability. Several relevant policy implications are drawn from this analysis. First, the implementation of a cyclical capital component as proposed in Basel III, while successful in reducing financial instability when applied alone, loses its efficacy when combined with some interest rate rules. Second, interest rate smoothing is more effective than the other interest rate rules assessed, as it outperforms them concerning financial stability and performs as well as them regarding macroeconomic stability. Finally, there is no long-run tradeoff between monetary and financial stability regarding the sensitiveness of the cyclical capital component to the credit-to-output ratio, as well as the smoothing interest rate parameter
    Date: 2015–08
  4. By: Graeme O'Meara
    Abstract: This study contributes to the ongoing debate over the causes of housing bubbles. The argument that excessively low interest rates were responsible for the run up in house prices over the last decade has received considerable attention in the literature. However, few papers have attempted to quantify the extent of house price overvaluation in countries that have seen housing booms and busts, in addition to quantifying the looseness of monetary policy. For a sample of 10 OECD countries, we estimate fundamental house prices using demand and supply side characteristics of the housing market. This is supplemented with analysis of price to rent ratios and fundamental price to rent ratios. Loose monetary policy is defined as the deviation of the short term interest rate from the rate which the Taylor rule would prescribe. The empirical results suggest that for some countries deviations from the Taylor rule played a role in the surge in house prices and that a monetary policy stance less discretionary and more closely aligned with a Taylor rule could curtail some of the imbalance in the housing market.
    Keywords: Housing bubbles; Taylor rule; Monetary policy; Interest rates
    JEL: E52 E58 R31 F33
    Date: 2015
  5. By: Máximo Camacho; Danilo Leiva-León; Gabriel Pérez-Quiros
    Abstract: Previous studies have shown that the effectiveness of monetary policy depends, to a large extent, on the market expectations of its future actions. This paper proposes an econometric framework to address the effect of the current state of the economy on monetary policy expectations. Specifically, we study the effect of contractionary (or expansionary) demand (or supply) shocks hitting the euro area countries on the expectations of the ECB.s monetary policy in two stages. In the first stage, we construct indexes of real activity and inflation dynamics for each country, based on soft and hard indicators. In the second stage, we use those indexes to provide assessments on the type of aggregate shock hitting each country and assess its effect on monetary policy expectations at different horizons. Our results indicate that expectations are responsive to aggregate contractionary shocks, but not to expansionary shocks. Particularly, contractionary demand shocks have a negative effect on short term monetary policy expectations, while contractionary supply shocks have negative effect on medium and long term expectations. Moreover, shocks to different economies do not have significantly different effects on expectations, although some differences across countries arise.
    Date: 2015–08
  6. By: Davig, Troy; Gürkaynak, Refet S.
    Abstract: No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.
    Keywords: central banking; fiscal policy; monetary policy; optimal policy; optimal policy mix
    JEL: E02 E52 E58 E61
    Date: 2015–08
  7. By: Tang, Jenny (Federal Reserve Bank of Boston)
    Abstract: A growing body of evidence supports the view that monetary policy actions communicate information about the state of the economy to an imperfectly informed public. Therefore, it is important for policymakers to understand the implications of this signaling channel for optimal policy as well as for the value of central bank communication. This paper studies, both theoretically and empirically, a setting where such a monetary policy signaling channel arises because the policymaker has more information about economic fundamentals than private agents have. In this environment, policy actions taken in response to fundamentals provide a signal to rational private agents about those fundamentals.
    JEL: E52
    Date: 2013–10–13
  8. By: Masanao Itoh (Professor, Otsuma Women's University and IMES, Bank of Japan (E-mail:; Ryoji Koike (Director and Deputy Head of Monetary History Studies Group, IMES, Bank of Japan (E-mail:; Masato Shizume (Professor, Waseda University and IMES, Bank of Japan (E-mail:
    Abstract: This monographic paper summarizes views held by the Bank of Japan (hereafter BOJ or the Bank) in the 1980s regarding economic conditions and monetary policy formulation, perceived from the BOJ archives and other materials from the period. From a historical viewpoint, the authors see the 1980s as a watershed time for the Bank's policy formulation, because the Bank acquired lessons for monetary policy formulation under a large fluctuation in economic and financial conditions and innovated new approaches for monetary policy formulation and money market management as stated below. First, during the 1980s the BOJ had to largely consider the external imbalance in formulating policy, and attention began to shift towards price stability in the medium or long term by the end of the decade. Second, the large fluctuations in asset prices, money supply, and commercial bank lending were closely monitored during this period, but the Bank's assessment about their impacts on macroeconomic consequences in the medium to long term was insufficient. A reflection of these lessons appears to evolve into a perspective on the Bank's monetary policy formulation that financial imbalances should be examined as a risk for achieving price stability in the medium to long term. Third, in light of ongoing financial deregulation during this period, the Bank started to change monetary policy measures from those based on a regulated interest rate framework to those based on market operation with good use of money markets and flexible interest rates.
    Keywords: Monetary policy management, Price stability in the medium and long term, Financial imbalance, External imbalance, Financial deregulation
    JEL: E52 N15
    Date: 2015–08
  9. By: James D. Hamilton; Ethan S. Harris; Jan Hatzius; Kenneth D. West
    Abstract: We examine the behavior, determinants, and implications of the equilibrium level of the real federal funds rate, defined as the rate consistent with full employment and stable inflation in the medium term. We draw three main conclusions. First, the uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed. Our narrative and econometric analysis using cross-country data and going back to the 19th Century supports a wide range of plausible central estimates for the current level of the equilibrium rate, from a little over 0% to the pre-crisis consensus of 2%. Second, despite this uncertainty, we are skeptical of the “secular stagnation” view that the equilibrium rate will remain near zero for many years to come. The evidence for secular stagnation before the 2008 crisis is weak, and the disappointing post-2008 recovery is better explained by protracted but ultimately temporary headwinds from the housing supply overhang, household and bank deleveraging, and fiscal retrenchment. Once these headwinds had abated by early 2014, US growth did in fact accelerate to a pace well above potential. Third, the uncertainty around the equilibrium rate implies that a monetary policy rule with more inertia than implied by standard versions of the Taylor rule could be associated with smaller deviations of output and inflation from the Fed’s objectives. Our simulations using the Fed staff’s FRB/US model show that explicit recognition of this uncertainty results in a later but steeper normalization path for the funds rate compared with the median “dot” in the FOMC’s Summary of Economic Projections.
    JEL: E32 E43 E52
    Date: 2015–08
  10. By: Demostenes N. Tambakis
    Abstract: I study the long run determinacy tradeoff - recurrent episodes of passive monetary policy are (in)determinate if their expected duration is long (brief ) - when passive pol- icy is at the zero bound. On-going regime change implies qualitatively different shock transmission from the standard New Keynesian model. For U.S. baseline parameter values, I find temporary fiscal stimulus is effective, while adverse supply shocks can be expansionary if the central bank's active policy stance is weak and/or if the liquidity trap's average duration exceeds 3 quarters.
    Keywords: Zero bound; Monetary policy; Regime-switching; Determinacy
    JEL: E31 E52 E58 E61
    Date: 2015–07–19
  11. By: Falk Mazelis; ; ;
    Abstract: This paper investigates the heterogeneous impact of monetary policy shocks on nancial in- termediaries. I distinguish between banks and shadow banks based on their funding constraints. Because credit creation by banks responds to economy-wide productivity endogenously, bank reaction to shocks corresponds to the balance sheet channel. Shadow banks are constrained by their available funding and their behavior is better explained by the lending channel. In line with empirical observations, shadow bank lending moves in the opposite direction to bank lending following monetary policy shocks, which mitigates aggregate credit responses. The propagation of real and nancial shocks is likewise altered when shadow banks are identied as a distinct sector among nancial intermediaries. Following estimation of the model using Bayesian methods, a historical shock decomposition highlights the roles of banks and shadow banks in the run-up to the 2007 - 08 nancial crisis.
    Keywords: Shadow Banking, Monetary Policy Transmission, Credit Channel, Bayesian Methods, Search Frictions
    JEL: E32 E44 E51 G20
    Date: 2015–08
  12. By: Alfred Duncan
    Abstract: Alfred Duncan investigates the Labour Party’s Variable Savings Rate policy, where KiwiSaver contributions would become compulsory, and contribution rates adjusted by the Reserve Bank in conjunction with changes in the Official Cash Rate to achieve Monetary Policy objectives.
    Date: 2014–09–01
  13. By: Emna Trabelsi (ISG - Institut Supérieur de Gestion de Tunis [Tunis] - Université de Tunis [Tunis])
    Abstract: This paper outlines the implications of central bank transparency coupled with economic globalization on the effectiveness of monetary policy at achieving low and stable inflation, through an empirical analysis on a sample of 34 OECD central banks. Our results are threefold: (i) There is a dampening and highly significant negative impact of economic globalization (measured by the composite index of Dreher et al., 2008) on inflation (ii) An appropriate and efficient U shape test proposed by Lind and Mehlum (2010), indicates a robust optimal intermediate degree of transparency, but suggests new evidence as to its level differently from van der Cruijsen et al. (2010). Indeed, the optimal level is higher and seems to vary according to the set of controls included in the regression. The estimations were run using a bias corrected Least Square Dummy variable (hereafter, LSDVC), developed by Bruno (2005) for short dynamic panels with fixed effects, and extended to accommodate unbalanced data. Alternative results using Generalized Method of Moments (hereafter GMM) estimators: (Arellano and Bond, 1991, hereafter AB; Blundell and Bond, 1998, hereafter BB) are also provided. (iii) We find, overall, that LSDVC and BB estimators exhibit satisfactory fit, while AB estimator doesn't confirm the hypothesis of a quadratic relationship between transparency and inflation.
    Date: 2015–05–28
  14. By: Andreasen, Martin M (Aarhus University and CREATES); Meldrum, Andrew (Bank of England)
    Abstract: We use a no-arbitrage shadow rate term structure model to estimate investors’ views about the timing of monetary policy ‘lift-off’ in the United Kingdom over time. Our estimates show that when the UK policy rate was first cut to 0.5%, in March 2009, investors believed that it would remain at the lower bound only for a short period, with an estimated probability of 70% that the policy rate would rise above 0.75% within twelve months. The estimated median horizon for policy rate lift-off rose sharply in 2012 but fell back to thirteen months by the end of our sample period, in May 2014.
    Keywords: Shadow rate models; sequential regression estimation; policy lift-off; zero lower bound.
    JEL: C10 C50 G12
    Date: 2015–08–14
  15. By: Luís Fonseca; Matteo Crosignani; Miguel Faria-e-Castro
    Abstract: We analyze the effect of unconventional monetary policy, in the form of collateralized lending to banks, on sovereign borrowing costs. Using our unique dataset on monthly security- and bank-level holdings of government bonds, we document that Portuguese banks increased their holdings of domestic public debt during the allotment of the three year Long-Term Refinancing Operations (LTRO) of the European Central Bank. We argue that domestic banks engaged in a "collateral trade", which involved the purchase of high-yield bonds with short maturities that could be pledged as collateral for low cost and long-term borrowing from the ECB. This significant increase in bond holdings was concentrated in shorter maturities, as these were especially suited to mitigate funding liquidity risk. The resulting steepening of the sovereign yield curve and the timing and characteristics of government bond auctions are consistent with a strategic response by the debt management agency.
    JEL: E44 E52 E63 G21
    Date: 2015
  16. By: Abbassi, Puriya; Fecht, Falko; Tischer, Johannes
    Abstract: We study the intraday interest rate in a CCP-based GC pooling repo market and its key determinants. Since collateral used in this market is identical to collateral eligible for the daylight overdraft facility of the Eurosystem, any intraday rate in this market cannot be a result of collateral constraints keeping banks from using the overdraft for arbitrage. Nevertheless, we find that in the crisis period a statistically and economically significant intraday spread (up to 60 basis points) prevailed that was only somewhat mitigated by the ECB's unconventional monetary policy measures. Our results show that this spread was mainly determined by the market liquidity of the repo market, suggesting that the intraday spread is largely a liquidity premium.
    Keywords: intraday interest rate,central counterparty,overnight repos,central bank intervention,financial crisis
    JEL: E43 E50 G01 G10 G21
    Date: 2015
  17. By: Foley-Fisher, Nathan (Federal Reserve Board); Ramcharan, Rodney (University of Southern California); Yu, Edison (Federal Reserve Bank of Philadelphia)
    Abstract: This paper investigates the impact of unconventional monetary policy on firm financing constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), which was intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms with stronger balance sheets. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier debt also rose during the MEP. Our results suggest that unconventional monetary policy may have helped to relax financing constraints and stimulate economic activity in part by affecting the pricing of risk in the bond market.
    Keywords: Quantitative easing; Unconventional monetary policy; Preferred habitat; Financial constraints
    JEL: E5 G3
    Date: 2015–08–13
  18. By: Crowley, Patrick (Texas A&M University - Corpus Christi); Hudgins, David (Texas A&M University - Corpus Christi)
    Abstract: This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro Area quarterly GDP data from 1995 – 2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet decomposition model. Our study builds a MATLAB program that simulates optimal policy thrusts at each frequency range where: (1) both fiscal and monetary policy are emphasized, (2) only fiscal policy is relatively active, and (3) when only monetary policy is relatively active. The results show that the monetary authorities should utilize a strategy that influences the short-term market interest rate to undulate based on the cyclical wavelet decomposition in order to compute the optimal timing and levels for the aggregate interest rate adjustments. We also find that modest emphasis on active interest rate movements can alleviate much of the volatility in optimal government spending, while rendering similarly favorable levels of aggregate consumption and investment. This research is the first to construct joint fiscal and monetary policies in an applied optimal control model based on the short and long cyclical lag structures obtained from wavelet analysis.
    Keywords: discrete wavelet analysis; euro area; fiscal policy; LQ tracking; monetary policy; optimal control
    JEL: C49 C61 C63 C88 E52 E61
    Date: 2015–08–12
  19. By: Jiranyakul, Komain
    Abstract: This study explored the degree of inflation persistence in Thailand using both monthly headline and sectoral CPI indices during the 1985-2012 period. The results showed that the degree of inflation persistence for the headline inflation did not exist under the fixed exchange rate regime, even though some sectoral inflation series exhibited persistence. Under the floating regime, the headline inflation persistence was low, but various sectoral inflation rates showed low to moderate persistence. Therefore, inflation persistence for the entire sample period was caused by the switch from fixed to floating regime. Furthermore, there seemed to be no monetary accommodation of inflation persistence under the floating regime. Based upon the results from this study, inflation targeting implemented in May 2000 to combat inflation might not fully reduce inflation to the target of price stability.
    Keywords: Inflation persistence, exchange rate regimes, monetary policy, inflation targeting
    JEL: C22 E31
    Date: 2015–08
  20. By: Altunok, Fatih; Mitchell, Karlyn; Pearce, Douglas
    Abstract: We investigate whether a trade credit channel mitigates monetary policy tightenings intended to slow economic activity. Unlike prior research, we study this issue using quarterly firm-level data for nearly the universe of non-financial public corporations and using more precise measures of their credit market access. We estimate firm-level models of the supply and demand for trade credit from 1988 to 2008. Our evidence suggests that policy tightenings evoke a flow of trade credit from public firms commensurate with their credit market access which goes primarily to private firms, a previously undocumented finding.
    Keywords: trade credit, trade credit channel, monetary policy transmission
    JEL: E5 E52 G1
    Date: 2015–08–10
  21. By: Christian Gillitzer (Reserve Bank of Australia); John Simon (Reserve Bank of Australia)
    Abstract: Since the introduction of inflation targeting, inflation expectations have become firmly anchored at target and there has been a flattening of the Phillips curve. These changes mean that a 'divine coincidence' between headline inflation and output gap stabilisation is less apparent than when inflation targeting was introduced. This has led some to call for a fundamental re-engineering of inflation-targeting regimes: either adopting explicit dual mandates or replacing headline inflation with a target inflation measure more closely related to domestic output gaps. We argue instead for an evolution in the practice of CPI inflation targeting. In practice, many central banks have already moved in this direction with the adoption of flexible inflation-targeting frameworks.
    Keywords: inflation targeting; Phillips curve; Australia
    JEL: E31 E52 E58
    Date: 2015–08
  22. By: Sidibe, Tidiani
    Abstract: The debate on the relevance of monetary cooperation agreements with France was back in the saddle by former Malian Prime Minister Moussa MARA July 23, 2015 during a radio broadcast; and Chadian President Idriss Deby Itno during the 55th anniversary of his country's 2015 Tuesday, August 11 The latter threw a big spanner in the franc zone, arguing that currency allows us to develop. Also, some harsh criticism, consider that the CFA franc, pegged to a strong euro hampers the competitiveness of our exports of raw materials quoted in dollars or pounds on the main financial centers in New York, London. This article shows the opposite, highlighting the arguments of stability and credibility enjoyed by the CFA franc. Indeed, the real effective exchange rate (REER) of the CFA franc jouie good parity level relative to trading partners, which means that the CFA franc is neither undervalued nor overestimates. Member countries become more competitive. The foreign reserves of the central banks (BCEAO and BEAC) represented the end of December 2014, only 4.9 months of imports. Monetary cooperation with France is not a zero sum game, it's a win-win partnership. Priority should be given to macroeconomic convergence.
    Keywords: Zone franc, central bank , currency, monetary maturity, foreign exchange reserves, real effective exchange rate ( REER) , exchange parity, unlimited convertibility guarantee, transaction accounts , devaluation , monetary policy, opportunity cost , common currency ECOWAS.
    JEL: E52 E58
    Date: 2015–08–25
  23. By: Paul Hubert (OFCE - OFCE - Sciences Po)
    Abstract: We aim at investigating how two different types of central bank communication affect the private inflation expectations formation process. The effects of ECB inflation projections and Governing Council members’ speeches on private inflation forecasts are identified through an Instrumental-Variables estimation using a Principal Component Analysis to generate valid instruments. We find that ECB projections have an effect on private current-year forecasts, while ECB speeches and the ECB rate impact next-year forecasts. When both communication types are interacted and go in the same direction, the inflation outlook signal tends to outweigh the policy path signal conveyed to private agents (and vice-versa).
    Date: 2014–12
  24. By: Alho, Kari E.O.
    Abstract: Specifying a structurally built NKM model for EMU, and identifying in it the determinants of the potential output and the short-run cyclical factors, we consider structural reforms and monetary and fiscal policies in the euro area. Especially, we analyse whether structural reforms are deflationary or boost the economy in the short run and create spillovers within the euro area under the zero lower bound (ZLB) of the interest rate. We find that a structural reform towards a more competitive economy by lowering the mark ups in the goods and labour market is beneficial both in the short and long run, and both under normal and the ZLB situation in the financial markets. Coordination of reforms within the euro area is also called for, because the spillovers from reforms are typically negative. The national governments searching for an optimal structural policy can delegate the stabilization efforts to the ECB in a long-run equilibrium, but in the short run this separation does not hold in general. We find that in a recession the reform policy is typically curtailed, while in a boom it initially exceeds the long-run equilibrium of reform activity. Proper fiscal policy can alleviate this problematic feature in structural reform policies.
    Keywords: structural reform, EMU, coordination
    JEL: E63 E61 F42
    Date: 2015–08–24
  25. By: Christian-Lambert Nguena (REMA - REMA - REMA (Research in Applied Micro and Macro Economy) - REMA - Recherche); Roger Tsafack-Nanfosso (REMA - REMA - REMA (Research in Applied Micro and Macro Economy) - REMA - Recherche)
    Abstract: This paper qualitatively and quantitatively assesses the degree of resilience in the financial intermediary sector of the Economic and Monetary Community of Central African States (CEMAC) to macroeconomic shocks and discusses the relevant policy implications. Using GMM and a battery of estimations techniques, the panel-based investigations broadly show that the sub-region is vulnerable to macroeconomic shocks. Lower bank provisions result on the one hand from shortages or decreases in long-term financing, real exchange, GDP per capita growth rate and on the other hand from increases of interest rates. Whereas the change in interest rate increases net income commission, the effect is negative from lower levels of short-term financing. The incidence of changes in interest rates on the interest rate margin of banks is ambiguous. The findings broadly confirm the need to incorporate macroeconomic shocks in financial policy decision making. The paper contributes at the same to the knowledge on stock management in monetary zones and the need to: (1) timely intervene to mitigate potential shocks and; (2) increase control to sustain the credibility of the banking system.
    Date: 2014–02–28
  26. By: Franz Ruch (South African Reserve Bank); Mehmet Balcilar Author-Name-First Mehmet (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus); Mampho P. Modise (National Treasury, 40 Church Square, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: Forecasting and estimating core inflation has recently gained attention, especially for inflation targeting countries, following research showing that targeting headline inflation may not be optimal; a Central Bank can miss the signal due to the noise. Despite its importance there is sparse literature on estimating and forecasting core inflation in South Africa, with the focus still on measuring core inflation. This paper emphasises predicting core inflation using large time-varying parameter vector autoregressive models (TVP-VARs), factor augmented VAR, and structural break models using quarterly data from 1981Q1 to 2013Q4. We use mean squared forecast errors (MSFE) and predictive likelihoods to evaluate the forecasts. In general, we find that (i) small TVP-VARs consistently outperform all other models; (ii) models where the errors are heteroscedastic do better than models with homoscedastic errors; (iii) models assuming that the forgetting factor remains 0.99 throughout the forecast period outperforms models that allow for the forgetting factors to change with time; and (iv) allowing for structural break does not improve the predictability of core inflation. Overall, our results imply that additional information on the growth rate of the economy and interest rate is sufficient to forecast core inflation accurately, but the relationship between these three variables needs to be modelled in a time-varying (nonlinear) fashion.
    Keywords: Core inflation; forecasting; small- and large-scale vector autoregressive models; constant and time-varying parameters
    JEL: C22 C32 E27 E31
    Date: 2015
  27. By: Kubo, Koji
    Abstract: Since the abolition of the official peg and the introduction of a managed float in April 2012, the Central Bank of Myanmar has operated the daily two–way auctions of foreign exchange aimed at smoothing exchange rate fluctuations. Despite the reforms to the foreign exchange regime, however, informal trading of foreign exchange remains pervasive. Using the daily informal exchange rate and Central Bank auction data, this study examines the impacts of auctions on the informal market rate. First, a VAR analysis indicates that the official rate did not Granger cause the informal rate. Second, GARCH models indicate that the auctions did not reduce the conditional variance of the informal rate returns. Overall, the auctions have only a quite modest impact on the informal exchange rate.
    Keywords: Myanmar, Foreign exchange, Monetary policy, Foreign exchange auctions, Informal market rate, GARCH model
    JEL: E65 F31 O24
    Date: 2015–08
  28. By: Gerlach, Stefan; Kugler, Peter
    Abstract: Expectations of Sterling returning to Gold have been disregarded in empirical work on the US dollar – Sterling exchange rate in the early 1920s. We incorporate such considerations in a PPP model of the exchange rate, letting the probability of a return to gold follow a logistic function. We draw several conclusions: (i) the PPP model works well from spring 1919 to spring 1925; (ii) wholesale prices outperform consumer prices; (iii) allowing for a return to gold leads to a higher speed of adjustment of the exchange rate to PPP; (iv) interest rate differentials and the relative monetary base are crucial determinants of the expected return to gold; (v) the probability of a return to Gold peaked at about 72% in late 1924 and but fell to about 60% in early 1925; and (vi) our preferred model does not support the Keynes’ view that Sterling was overvalued after the return to gold.
    JEL: E5 F31 N1
    Date: 2015–08
  29. By: Tianhao Zhi (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: The Modern Money Theory, originated from the seminal work of Knapp (1905) that established the “chartalism school of monetary theory” and later on, synthesized by so-called “neo-chartalists” such as Wray (2012), is a descriptive economic theory that examines the procedures and consequences of using government-issued tokens as the unit of money. Despite its high relevance in today's policy arena that demands a thorough understanding over the modern fiat monetary system, MMT is generally not well-received by mainstream academics due to some of its radical claims. In an experimental and preliminary manner, this paper proposes a set of disequilibrium models that aims to take a further investigation over the balance sheet effects of those transactions discussed by MMT from a dynamic perspective. We contend that some of the claims made by MMT are fallacious due to its omission of dynamic and behavioural aspects. The framework proposed in this paper would also be useful for future research from a dynamic MMT perspective.
    Keywords: Modern Money Theory (MMT); endogenous money; interbank market; fiscal policy; disequilibrium dynamics
    JEL: E12 E52 E62 G21
    Date: 2015–08–01
  30. By: Lane, Philip R.
    Abstract: This paper examines the cyclical behaviour of country-level macro-financial variables under EMU. Monetary union strengthened the covariation pattern between the output cycle and the financial cycle, while macro-financial policies at national and area-wide levels were insufficiently counter-cyclical during the 2003-2007 boom period. We critically examine the policy reform agenda required to improve macro-financial stability.
    Keywords: EMU; financial stability; macroprudential
    JEL: E50 F30 F32
    Date: 2015–08
  31. By: Fedotenkov, Igor
    Abstract: This paper provides an explanation of why population ageing is associated with deflationary processes. For this reason, we create an overlapping-generations model (OLG) with money created by credits (inside money) and intergenerational trade. In other words, we combine a neoclassical OLG model, with post-Keynesian monetary theory. The model links demographic factors, such as fertility rates and longevity, to prices. We show that lower fertility rates lead to a smaller demand for credits, and lower money creation, which causes a decline in prices. Changes in longevity affect prices via real savings and capital market. Furthermore, we address a few links between interest rates and inflation, which arise in the general equilibrium, and are not thoroughly discussed in the literature. Long-run results are derived analytically; short-run dynamics is simulated numerically.
    Keywords: Population ageing, inflation, OLG model, inside money, credits
    JEL: E12 E31 J10
    Date: 2015–07–10
  32. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We compare inflation forecasts of a vector fractionally integrated autoregressive moving average (VARFIMA) model against standard forecasting models. U.S. inflation forecasts improve when controlling for persistence and economic policy uncertainty (EPU). Importantly, the VARFIMA model, comprising of inflation and EPU, outperforms commonly used inflation forecast models.
    Keywords: Inflation; long-range dependency; economic policy uncertainty;
    JEL: C53 E37
    Date: 2014
  33. By: Paulo Júlio; Ricardo Mourinho Félix; Gabriela Lopes de Castro; José R. Maria
    Abstract: We define "financial fragmentation shocks" as fluctuations in credit market frictions in a small euro area economy. The shock changes the financial integration status quo of the monetary union, given its negligible international spillover. An increase in credit market frictions triggers a recession in the small economy. Perfect competition and the absence of nominal rigidities attenuate output volatility. Expectations also matter: real impacts weaken when long fragmentation time spans are perceived to be short lived. Contrarily to ""risk shocks", defined as fluctuations in borrowers' riskiness, fragmentation shocks do not imply strongly countercyclical bankruptcy rates. The results are based on PESSOA, a general equilibrium model with a Bernanke-Gertler-Gilchrist financial accelerator mechanism.
    JEL: E27 E44
    Date: 2015
  34. By: Claudio Sardoni (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome (Italy).)
    Abstract: Many Keynesian economists focus their attention on money as a store of value as a defence from uncertainty. Many others monetary economists, also quite close to the Keynesian approach in several respects, emphasise the importance of money as standard of value and means of payment. By drawing on Hicks's and Kaldor's contributions, this paper suggests an approach in which money is characterized by its two functions of standard of value and means of payment, which are inherently connected to one another. The role of store of value, in economies with well developed financial markets, can be normally played by other assets as liquid and risk-less as money. Therefore, the demand for liquidity as a defence against uncertainty should be kept distinct from the demand for money strictly defined.
    Keywords: Money, Liquidity, Uncertainty, Financial Markets.
    JEL: E4 E5 G1
    Date: 2015–08
  35. By: Berger, Allen N. (University of SC and University of PA); Black, Lamont K. (DePaul University); Bouwman, Christa H. S. (Case Western Reserve University and University of PA); Dlugosz, Jennifer (Washington University in St Louis)
    Abstract: The Federal Reserve injected unprecedented liquidity into banks during the crisis using the discount window and Term Auction Facility. We examine these facilities' use and effectiveness. We find: small bank users were generally weak, large bank users were not; the funds substituted to a limited degree for other funds; these facilities increased aggregate lending which would have decreased in their absence. The funds enhanced lending of expanding banks and reduced the decline at contracting banks. Small banks increased small-firm lending, while large banks enhanced large-firm lending. Loan quality only improved at small banks, while both left loan contract terms unchanged.
    JEL: E58 G21 G28
    Date: 2014–04
  36. By: Pejman Bahramian (Department of Economics, Eastern Mediterranean University, Famagusta, Turkish Republic of Northern Cyprus, via Mersin 10, Turkey); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey); Rangan Gupta (Department of Economics, University of Pretoria); Patrick T. kanda (Department of Economics, University of Pretoria)
    Abstract: The conduct of inflation targeting is heavily dependent on accurate inflation forecasts. Non-linear models have increasingly featured, along with linear counterparts, in the forecasting literature. In this study, we focus on forecasting South African infl ation by means of non-linear models and using a long historical dataset of seasonally-adjusted monthly inflation rates spanning from 1921:02 to 2013:01. For an emerging market economy such as South Africa, non-linearities can be a salient feature of such long data, hence the relevance of evaluating non-linear models' forecast performance. In the same vein, given the fact that 1969:10 marks the beginning of a protracted rising trend in South African inflation data, we estimate the models for an in-sample period of 1921:02-1966:09 and evaluate 24 step-ahead forecasts over an out-of-sample period of 1966:10-2013:01. In addition, using a weighted loss function specification, we evaluate the forecast performance of different non-linear models across various extreme economic environments and forecast horizons. In general, we find that no competing model consistently and significantly beats the LoLiMoT's performance in forecasting South African inflation.
    Keywords: Inflation; forecasting; non-linear models; weighted loss function; South Africa
    JEL: C32 E31 E52
    Date: 2014
  37. By: Crowley, Patrick (Texas A&M University - Corpus Christi); Trombley, Christopher (Texas A&M University - Corpus Christi)
    Abstract: Within currency unions, the conventional wisdom is that there should be a high degree of macroeconomic synchronicity between the constituent parts of the union. But this conjecture has never been formally tested by comparing sample of monetary unions with a control sample of countries that do not belong to a monetary union. In this paper we take euro area data, US State macro data, Canadian provincial data and Australian state data — namely real Gross Domestic Product (GDP) growth, the GDP deflator growth and unemployment rate data — and use techniques relating to recurrence plots to measure the degree of synchronicity in dynamics over time using a dissimilarity measure. The results show that for the most part monetary unions are more synchronous than non-monetary unions, but that this is not always the case and particularly in the case of real GDP growth. Furthermore, Australia is by far the most synchronous monetary union in our sample.
    Keywords: business cycles; growth cycles; frequency domain; optimal currency area; macroeconomic synchronization; monetary policy; single currency
    JEL: C49 E32 F44
    Date: 2015–07–31
  38. By: Paul Hubert (OFCE - OFCE - Sciences Po)
    Abstract: Since Romer and Romer (2000), a large literature has dealt with the relative forecasting performance of Greenbook macroeconomic forecasts of the Federal Reserve. This paper empirically reviews the existing results by comparing the different methods, data and samples used previously. The sample period is extended compared to previous studies and both real-time and final data are considered. We confirm that the Fed has a superior forecasting performance on inflation but not on output. In addition, we show that the longer the horizon, the more pronounced the advantage of Fed on inflation and that this superi- ority seems to decrease but remains prominent in the more recent period. The second objective of this paper is to underline the potential sources of this supe- riority. It appears that it may stem from better information rather than from a better model of the economy.
    Date: 2014–10
  39. By: Eisenbeis, Robert (?); Herring, Richard (?)
    Abstract: This paper focuses on how the Federal Reserve (Fed) responded to the early stage of the international financial crisis, from 2007 through 2008, which it characterized as a short-term liquidity problem, despite growing evidence of potential insolvencies among some of the largest banks and investment banks [1]. The Fed provided large amounts of liquidity to both domestic and international institutions when credit risk spreads suddenly widened in September of 2007 and still more liquidity when these spreads virtually exploded in September of 2008 in the wake of the collapse of Fannie Mae and Freddie Mac and the bankruptcy of Lehman Brothers [2]. We argue that signs of increasing financial fragility and potential insolvencies appeared much earlier than fall of 2007. If these had been recognized and acted upon by the regulatory authorities, then it is possible that the most serious financial crisis since the Great Depression might have been substantially mitigated. While it is inherently difficult to disentangle issues of illiquidity from insolvency, the failure to recognize and address the insolvency problems in several major institutions delayed necessary adjustments and undermined confidence in the financial system.
    Date: 2014–12
  40. By: Masaaki Fujii (Faculty of Economics, The University of Tokyo); Akihiko Takahashi (Faculty of Economics, The University of Tokyo)
    Abstract: Collateralization with daily margining and the so-called OIS-discounting have become a new standard in the post-crisis financial market. Although there appeared a large amount of literature to deal with a so-called multi-curve framework, a complete picture for a multi-currency setup with currency funding spreads, which are necessary to explain non-zero cross currency basis, can be rarely found since our initial attempts [9, 10, 11]. This note gives an extension of these works regarding a general framework of interest rates for a fully collateralized market. We provide a new formulation of the currency funding spread which is more suitable in the presence of non-zero correlation to the collateral rates. In particular, the last half of the paper is dedicated to develop a discretization of the HJM framework including stochastic collateral rates, LIBORs, foreign exchange rates as well as currency funding spreads with a fixed <i>tenor structure</i>, which makes it readily implementable as a traditional Market Model of interest rates.
    Date: 2015–08
  41. By: Sandro Claudio Lera; Didier Sornette
    Abstract: We study the performance of the euro/Swiss franc exchange rate in the extraordinary period from September 6, 2011 and January 15, 2015 when the Swiss National Bank enforced a minimum exchange rate of 1.20 Swiss francs per euro. Within the general framework built on geometric Brownian motions (GBM), the first-order effect of such a steric constraint would enter a priori in the form of a repulsive entropic force associated with the paths crossing the barrier that are forbidden. It turns out that this naive theory is proved empirically to be completely mistaken. The clue is to realise that the random walk nature of financial prices results from the continuous anticipations of traders about future opportunities, whose aggregate actions translate into an approximate efficient market with almost no arbitrage opportunities. With the Swiss National Bank stated commitment to enforce the barrier, traders's anticipation of this action leads to a volatility of the exchange rate that depends on the distance to the barrier. This effect described by Krugman's model is supported by non-parametric measurements of the conditional drift and volatility from the data. Despite the obvious differences between "brainless" physical Brownian motions and complex financial Brownian motions resulting from the aggregated investments of anticipating agents, we show that the two systems can be described with the same mathematics after all. Using a recently proposed extended analogy in terms of a colloidal Brownian particle embedded in a fluid of molecules associated with the underlying order book, we derive that, close to the restricting boundary, the dynamics of both systems is described by a stochastic differential equation with a very small constant drift and a linear diffusion coefficient.
    Date: 2015–08
  42. By: Maria Ferrara; Patrizio Tirelli
    Abstract: This paper shows that a medium-scale DSGE model is able to explain a contemporaneous reduction of output and consumption during a disinflation policy, as it is in the empirical evidence. To this aim, we introduce Rotemberg (1982) adjustment costs and the limited asset market participation assumption.
    Keywords: Disináation, Rotemberg price adjustment, Monetary Policy
    JEL: E31 E5
    Date: 2015–08
  43. By: Castellari, Elena; Moro, Daniele; Platoni, Silvia; Sckokai, Paolo
    Abstract: In this paper we investigate the relationship between price dispersion and inflation; we use weekly retail scanner data from 2009 to 2011 to measure price dispersion and inflation for several dairy products. We implement a linear model to investigate the linkage between price dispersion and consumer price indexes. As in the previous literature, we obtain mixed results with respect to the relationship between price dispersion and inflation, and further investigation and theoretical refinement are needed to identify a common pattern.
    Keywords: price dispersion, consumer price indexes, food inflation, scanner data, dairy products, Agribusiness, Agricultural and Food Policy, L11, L66,
    Date: 2015–06

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